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Monetary policy transmission in the euro area: what do aggregate and national structural models tell us?

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  • Peter van Els

    (De Nederlandsche Bank)

  • Alberto Locarno

    ()
    (Banca dÂ’Italia, Economic Research Department)

  • Julian Morgan

    (European Central Bank)

  • Jean-Pierre Villetelle

    (Banque de France)

Abstract

This paper analyses the monetary transmission mechanism in the euro area through the use of large scale macroeconomic models at the disposal of the European Central Bank and the National Central Banks of the Eurosystem. The results reported are based on a carefully designed common simulation experiment involving a 100 basis point rise in the policy interest rate for two years accompanied by common assumptions regarding the path of longterm interest rates and the exchange rate. Aggregating the country level results, the fall in output is found to reach a maximum of 0.4 per cent after 2 years. The maximum aggregate fall in prices is also 0.4 per cent, but it occurs 2 years later. The dominant channel of transmission in the first two years is the exchange rate channel, but in terms of the impact on output, the user cost of capital channel becomes dominant from the third year of the simulation onwards.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 433.

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Date of creation: Dec 2001
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Handle: RePEc:bdi:wptemi:td_433_01

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Web page: http://www.bancaditalia.it
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Keywords: monetary policy transmission mechanism; macroeconomic models;

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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  2. Filippo Altissimo & Alberto Locarno & Stefano Siviero, 2002. "Dealing with forward-looking expectations and policy rules in quantifying the channels of transmission of monetary policy," Temi di discussione (Economic working papers) 460, Bank of Italy, Economic Research and International Relations Area.
  3. Stephen G. Cecchetti, 1999. "Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism," NBER Working Papers 7151, National Bureau of Economic Research, Inc.
  4. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  5. Stephen G. Cecchetti, 1995. "Distinguishing theories of the monetary transmission mechanism," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-97.
  6. Charles R. Bean, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 31-52, Fall.
  7. Eileen Mauskopf & Jeffrey Fuhrer & Peter Tinsley, 1990. "The transmission channels of monetary policy: how have they changed?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 985-1008.
  8. McAdam, Peter & Morgan, Julian, 2001. "The monetary transmission mechanism at the euro-area level: issues and results using structural macroeconomic models," Working Paper Series 0093, European Central Bank.
  9. Fromm, Gary & Klein, Lawrence R, 1973. "A Comparison of Eleven Econometric Models of the United States," American Economic Review, American Economic Association, vol. 63(2), pages 385-93, May.
  10. Marvin J. Barth III & Valerie A. Ramey, 2000. "The Cost Channel of Monetary Transmission," NBER Working Papers 7675, National Bureau of Economic Research, Inc.
  11. Mitchell, Peter R. & Sault, Joanne E. & Smith, Peter N. & Wallis, Kenneth F., 1998. "Comparing global economic models," Economic Modelling, Elsevier, vol. 15(1), pages 1-48, January.
  12. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  13. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
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